The basics of the new Employment Tax Incentive

The
Employment Tax Incentive Act of 2013 was signed into law on 17 December. The
purpose of the legislation is to encourage the hiring of young work seekers and
it became a political hot potato, with Cosatu, amongst others, strongly opposed
it.

In my view
it is doubtful whether it will make any meaningful difference to the
unemployment situation in South Africa. It is unlikely that employers will
employ unskilled workers simply to take advantage of a benefit which peaks at
R1 000 per month per qualifying employee. On the other hand, employers
that would have employed qualifying employees in any event will benefit from
the incentive, amounting to a deadweight loss to the fiscus.

Be that as
it may, the incentive is now in force and, for those employers that do employ
young employees or employees who may otherwise qualify, it is opportune to
consider the main features of the legislation. In a
nutshell the effect is that employers that are registered for Employees’ Tax
may reduce the Employees’ Tax payable to SARS without affecting the wage paid
to the qualifying employees.

The amount
of the reduction in Employees’ Tax depends on the remuneration (as defined for
PAYE purposes) paid to the qualifying employees. The benefit reaches a maximum
level of R1 000 per month per qualifying employee (for remuneration of
between R2 000 and R4 000 per month), decreasing to zero (for
remuneration of R6 000 per month and above). The scale of benefits per
month halves after the first 12 months of employment of a qualifying employee.

So for
example if an employer employs a qualifying employee who earns remuneration of
R4 000 per month, the employer would pay the R4 000 per month to the
employee but would obtain a credit of R1 000 per month for the first 12
months of the qualifying employee’s employment, assuming that the remuneration
was a constant R4 000 throughout this period, to offset against the total
Employees’ Tax liability (in respect of all of its employees).

For the
second 12 months of the qualifying employee’s employment the credit would halve
to R500 per month assuming that the employee continued to earn remuneration of
R4 000 per month during this period. The incentive has been made exempt
from Income Tax in the hands of the employer by virtue of a specific new
exemption provision.

The
legislation came into effect on 1 January 2014 although it is retroactive in
that it applies to new employment that commenced on or after 1 October 2013.
The incentive has a limited lifespan of three years and ceases to apply after 1
January 2017. However, benefits only apply for the first 24 months of a
qualifying employee’s employment.

In short, a
‘qualifying employee’ is an employee who is either:

Not
less than 18 years old and not more than 29 years old at the end of the
relevant month in respect of which the incentive is claimed;

Employed by an
employer operating within a Special Economic Zone (regardless of age); or

Employed by an
employer operating in an industry designated by the Minister of Finance by
notice in the Government Gazette.

In
addition, the employee must:

Not
be a ‘connected person’ (as defined in the Income Tax Act) in relation to the
employer;

Not be a domestic
worker;Either be in
possession of a South African identity card or an asylum seeker’s permit;

Have been employed
by the employer or an ‘associated person’ (as defined) on or after 1
October 2013 in respect of employment commencing on or after that date;

Be paid at least
the minimum wage applicable to the employer or the equivalent of
R2 000 for a full month (where there is no minimum wage relevant to
the employer); and

Earn remuneration
of less than R6 000 per month (or equivalent if the period of
employment is less than a full month) for the month in which the credit is
claimed.

Employers
are prohibited from claiming the incentive in circumstances where they have
outstanding tax returns or tax debts (other than tax debts not exceeding R100
or tax debts in respect of which payment arrangements have been made with
SARS).

Where the
incentive credit exceeds the Employees’ Tax payable during a particular month,
the excess is rolled over as a credit to the following month. If an employer
does not claim the credits in any particular month (for example in ignorance of
the legislation), then the amount of the unclaimed credits is rolled over as a
credit to the next month.

If the
employer becomes disqualified from claiming credits by virtue of having an
outstanding tax return or tax debt as discussed above, then credits continue to
accumulate during the period of disqualification.

However, on
the first day of the month following the end of an IRP 501 reporting period,
accumulated credits are limited to R6 000 per qualifying employee. It
appears that SARS will pay out credits due at the IRP 501 reporting date in
cash, provided that the employer is in good standing.

The Act
contains so-called ‘anti-displacement’ rules, designed to prevent the dismissal
of older, non-qualifying employees in circumstances that constitute an
automatically unfair dismissal in terms of the Labour Relations Act and the
replacement of such employees with qualifying employees. In such circumstances
a cash penalty of R30 000 per displaced employee becomes payable and the
employer may be disqualified from receiving the incentive, presumably on a
prospective basis.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.